There are four basic types of market structures by

traditional economic analysis: perfect competition

monopolistic competitionoligopoly monopoly

A monopoly is a market structure in which a single supplier produces and sells a given

product. If there is a single seller in a certain industry and there are not any close substitutes for the product, then the market

structure is that of a "pure monopoly"

MEANING OF MONOPOLYA monopoly exists when a specific person or

enterprise is the only supplier of a particular commodity.

The verb "monopolize" refers to the process by which a company gains the ability to raise prices or exclude competitors.

In economics, a monopoly is a single seller. In law, a monopoly is business entity that has

significant market power, that is, the power, to charge high prices.

CharacteristicsProfit MaximizePrice MakerHigh Barriers to EntrySingle seller and large no of buyersPrice DiscriminationMonopoly is Also an industryDemand curve under monopoly is downward

slopingNo selling cost required

How is Short run equilibrium of monopoly

is determined?Short run is a period in which monopolist can

change only variable factors.Fixed factors like machinery, plant cannot be

changed.If demand increases monopolist will utilize fixed

factors to their maximum capacity and using more of variable factors.

A monopolist will be in equilibrium when 2 conditions

satisfied:-MC=MRMC cuts MR from below

Monopolist in equilibrium may face 4 situations in short period:-

Super normal profit- AR>ACNormal profits- AR=AC

Minimum losses- AR<AC but AVC is covered

Shut down point- AR<AVC

SUPER NORMAL PROFITAR>AC monopolist will get super normal profits

Normal ProfitsIn this situation AR=AC

MINIMUM LOSSESIn this situation AR<AC but AVC is covered.

Shut down pointIn this situation AR<AVC

DETERMINATION OF LONG RUN EQUILIBRIUM UNDER MONOPOLY

Long run is a period when monopolist can vary all the factors and supply can be increased in response to increase in demand.

2 conditions need to be satisfied

long run MC is equal to MRlong run MC cuts MR from below

In long run a monopolist is not contented only with normal profits, rather it is in position to earn S.N.P

Thus fix price in such a way that there is S.N.P i.e. AR>LAC

MONOPOLY EQUILIBRIUM AND LAW OF COSTS

Whether a monopolist will fix more or less price of his product in the long run depends upon 2 things:

1. elasticity of demand2. effect of laws of costs on monopoly price

determination

DIMINISHING COSTSOutput obeys law of

diminishing costs means as Production increases its cost per unit goes on diminishing.

In this situation it is advisable for the monopolist to fix low price per unit and expand his sales in order to maximize profit.

INCREASING COSTSProduction obeys

the law of increasing costs, means as production increases – the cost of production also increases.

It will be beneficial for the monopolist to produce less and fix high price per unit.

CONSTANT COSTS

In this situation cost of production remain constant whether production is more or less.

Monopoly price with zero cost of productions

It is situation where monopolist has to incur no cost of production for producing the output.

Comparison between monopoly and perfect competition

Goal of firmAssumption regarding productionAssumption regarding number of sellers and

buyersAssumption regarding entryImplication regarding shape of demand curveImplication regarding decisionsControl over price

How is price and output determined under discriminating monopoly?

Meaning of price discrimination-

A monopolist often charges different prices of the same product from different consumers of

different industries. This price policy of monopolist is called price discrimination.

Kinds of discriminating policies

Personal price discriminationGeographical price discrimination

Price discrimination according to use

CONDITIONS FOR PRICE DISCRIMINATION

Existence of monopolySeparate marketDifference in elasticity of demandExpenditure in dividing and sub dividing

market to be minimumCommodity to orderLegal sanctionProduct differentiationBehavior of consumer

Equilibrium under discriminating monopoly

The aim of monopolist under discriminating monopoly is to maximize total revenue and profit. Conditions: MR=MC, MC cuts MR from below.

The discriminating monopoly is to decide about how much of the out[put is to be sold in diff markets and at what [price so as to get max profit.

To get max profit 2 conditions must be:

MR in both markets should be same

MR(A)= MR(B) =MC

DEGREES OF PRICE DISCRIMINATION

DISCRIMINATION OF 1ST DEGREE-It refers to that discrimination where in monopolists charges different prices for each unit of commodity

DISCRIMINATION OF 2ND DEGREE-It refers to that discrimination under which a monopolist sells a product at different prices in such a way that those who are prepared to pay more than price X are charged price X . On the contrary those who are prepared to pay less than price X and more than price Y are made to pay price Y for the product .

DISCRIMINATION OF 3RD DEGREE- It refers to that discrimination under which a monopolist divides the entire market of a product into 2 – 3 groups and charges different price from each group.

For instance , a monopolist charging higher price of a product in the domestic market and lower price in the foreign market , dis discrimination found in real life.

ROSHNI KAPOORRAVNEET KAUR

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